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Theoretical and Empirical Perspectives on Resource Misallocation and its Consequences


Traditional cross-country income accounting exercises have found large portions of aggregate total factor productivity remained unexplained. This dissertation sets out to quantify how far between-sector misallocation can go in explaining these differences. In Chapter \ref{Chap1}, I introduce a model based on Jones (2011a) whose primary components are an input-output structure, imperfect competition, sector level frictions, a Cobb-Douglas production functions with capital, labor, and intermediate factors, and an aggregate final good. I show that the wedge created by imperfect competition and frictions will be reflected by measuring markups by sector. Further, I introduce a definition of an aggregate markup which reflects not only the sector level markup, but also the markups included in input industries. I estimate the markups by sector using instruments for international intermediate goods, domestic intermediate goods, and labor price changes, and estimate the degree to which TFP and output would change from 39 countries shifting to US levels of wedges. Developing countries had predicted increases in aggregate productivity between 0\% and 27\% and output increases of between 0\% to 60\%.

In Chapter \ref{Chap2}, I use the model to perform hypothetical estimations how output would change if countries were to move to US levels of human capital stock per hour, capital stock per hour, sector-level productivities, sector demand parameters, and wedges. Sector productivity, capital, and human capital levels have consistently large and positive impacts on output. Movements to US level of sectoral demand have the largest effects, but also vary the most, with some countries facing large contractions and others increasing over 1000\%. Accounting for markups also provides a larger estimate of productivity, human capital, and capital stock multipliers than has been previously found. When accounting for the multiplier effect arising from sectors' dependence on inputs, the predicted effect of capital, human capital, misallocation, and productivity explain all of the differences in income as compared to the US for most countries in the sample.

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